How The Texas Railroad Commission Was The Blueprint For OPEC

Feb 29, 2016

The Organization of Petroleum Exporting Countries is not getting a lot of love in Texas these days. David Porter, top oil and gas regulator at the Railroad Commission of Texas, has accused OPEC of declaring an "oil war" against the state. Porter is leaving the Commission this year, and some of those running to replace him have used similar rhetoric.  

The reason? They blame OPEC for engineering the oil bust that's left thousands of workers unemployed and Texas energy companies slipping into the red.

Here's the standard narrative: OPEC normally controls global oil supply to keep prices high. But when the U.S. fracking boom started cutting into OPEC's business, the cartel decided to bring prices down. To clip the wings of U.S. producers, OPEC flooded the global market, sending oil prices through the basement.

"We're all in a situation in which, in order to protect themselves from falling prices everybody produces more, but the production of more makes prices fall faster," says UT Government professor David Prindle, author of Petroleum Politics and the Texas Railroad Commission

But one strange historical truth is often forgotten in arguments over who is to blame for oil's current condition, Prindle says: The Railroad Commission helped create OPEC. In fact, before OPEC existed, the Railroad Commission kind of was OPEC.

Here's how:

During the oil boom of the 1930s, large oil producers were worried that independent drillers were over-supplying the market (much as OPEC has been accused of doing today). To control production and stabilize prices the Railroad Commission issued "pro-ration" orders to limit production from each oil well.  

When independent oilmen in the East Texas field refused, the Governor of Texas went so far as to declare martial law and send in troops. Some said oil prices would rise "as the point of a bayonet."

It was a dramatic gesture but, in the long-term, it worked. The Railroad Commission, in partnership with other oil producing states, controlled oil production (and by extension, prices) for decades. 

Then, in the 1950s, the oil minister of Venezuela decided that if the Texans could do it, so should other oil producers.  

"He hired the chief engineer of the Railroad Commission, named Jack Baumel, to come to Venezuela and then show the oil minister of Saudi Arabia how it was done," says Prindle. "OPEC was explicitly modeled on the Texas Railroad Commission." 

Regardless of whether this was (as OPEC members might say) a necessary market correction or (as Porter has said) a "war," one fact is commonly lost in the rhetoric: The Railroad Commission of Texas helped create OPEC. 

But to the minds of some in Texas, it was, as previously stated, "war." 

Tuesday is Election Day. One of the positions up for vote is an empty seat on the Railroad Commission of Texas. Despite its name, the three-member Railroad Commission of Texas actually regulates oil and gas in the state.  The agency is sometimes criticized for having a light touch when it comes to regulating the industry on regulations. But that hasn't always been the case. And in a strange way, the agency's more heavy-handed past relates to exactly what happening now in the oil and gas industry, with all these low gas prices we’ve been enjoying.

Below watch Wildcatter: A Story of Texas Oil, courtesy of Texas Archive of the Moving Image.

 

Update: The broadcast version of this story contains the assertion that the Railroad Commission "deals with" issues of private property rights and eminent domain. Representatives from the Railroad Commission's Media Affairs Office have objected to this characterization, referring KUT to a page on the Commission's website that says "the Commission performs a clerical rather than judicial-type act" when it grants permits used in the process by which pipelines claim eminent domain powers.

 

It is true that the Commission has the reputation of giving a "rubber stamp" to pipeline companies seeking these permits. But it is worth noting that a different page on the Commission's website pertaining to pipeline rules contains this quote from Commission Chair David Porter: "The Commission has a duty to determine the proper classification of a pipeline and use that information to apply appropriate rules and regulations. These rule amendments improve our ability to determine which regulatory classification applies to a pipeline.”

 Click the following links to learn how the agency deals with permits used to assert eminent domain, how the agency has worked to overhaul that process, and how the agency has played a central role in public debates and legal battles over issues of property rights and eminent domain.